Tuesday, July 9, 2013, a blisteringly hot day in New York City. I’m in a cramped, twelfth-story closet of a courtroom, squeezed onto a wooden bench full of heavily perspiring lawyers and onlookers, watching something truly rare in the annals of modern American criminal justice—the prosecution of a bank.
The set for this curiosity is the city’s 100 Centre Street courthouse, a beat-up old building located far downtown, just a stone’s throw from the thicket of gleaming skyscrapers housing the great financial powers of Wall Street.
It’s a pretrial hearing. The defendants—nineteen individuals plus the corporation itself—are here today to argue a motion to dismiss. There’s no press here that I can see, despite the historic moment. And it is historic. This case, filed by New York County District Attorney Cyrus Vance Jr., represents the only prosecution of a bank to take place anywhere in America since the collapse of the world economy in 2008. (In fact, it’s the first since the early 1990s.)
So who’s the defendant? Is it Citigroup? Goldman Sachs? Wells Fargo? JPMorgan Chase? Bank of America? After all, these companies had all been involved in countless scandals since the financial crisis of ’08, a disaster caused by an epidemic of criminal fraud that wiped out some 40 percent of the world’s wealth in less than a year, affecting nearly everyone in the industrialized world. If ever there was a wave of white-collar crime that cried out for a criminal trial, it was this period of fraud from the mid-2000s. And it would make sense that the defendants should come from one of these companies. In the years since the crash, all of them, and a half-dozen more too-big-to-fail megafirms just like them, had already paid hundreds of millions of dollars in civil settlements for virtually every kind of fraud and manipulation known to man.
Moreover, District Attorney Vance had once seemingly had all these Wall Street firms in his sights. He’d sent subpoenas out to Goldman and other companies the previous year. So surely one of these banks in those big skyscrapers a few blocks south of here must be the one on trial.
Nope. In the end, the one bank to get thrown on the dock was not a Wall Street firm but one housed in the opposite direction, a little to the north—a tiny family-owned community bank in Chinatown called Abacus Federal Savings Bank.
As a symbol of the government’s ambitions in the area of cleaning up the financial sector, Abacus presents a striking picture. Instead of a fifty-story glass-and-steel monolith, Abacus is housed in a dull gray six-story building wedged between two noodle shops at the southern end of New York’s legendary Bowery, once the capital of American poverty.
This is the bank in court today, dragged to the cross to take the blame for the many sins of the financial sector. It is a grimly comic scene. The judge, the Honorable Renee White, is a legendary city curmudgeon, a wraithlike woman with a long turtlish neck and orange hair who seems unhappy not only to be listening to a motion to dismiss but to be on planet Earth at all.
Before the hearing began, in fact, she’d barked at a young Chinese woman who’d had the audacity to dip her head near the floor to sneak a drink from a water bottle in her bag, trying to fight off the stultifying heat. “No refreshments!” the judge yelled. “You should have had your lunch before you came to this courtroom!”
The young woman meekly put her bottle back into a bag. Judge White craned her long neck and glared. A burly bailiff, acting as many bailiffs do—as the physical manifestation of his judge’s whimsy—hovered angrily past to make sure the offending bottle was no longer visible.
“Is she always like this?” I whispered, to no one in particular.
“What are you talking about?” a lawyer in front of me answered. “She’s in a good mood today.”
Judge White frowned and then went about the dreary task of reseating the courtroom. She sent Cantonese-speaking defendants to her left, Mandarin-speaking defendants to the right, and had a single translator plopped into the middle of each bewildered group.
Some of the accused were low-level loan officers, immigrants mostly, who had been as young as twenty-one or as old as seventy at the time of arrest. None of them were what one would describe as wealthy persons. None were millionaire CEOs of the Jamie Dimon/Lloyd Blankfein ilk. Instead, they were mostly Chinese immigrants in cheap blouses and worn suits, people who spoke little English or none at all, and who looked white with shame and confusion as they huddled around their respective translators.
Many of these criminal masterminds had been earning as little as $35,000 a year at the time they were hauled in for what the state described as a far-reaching scheme to falsify loan applications for home mortgages that their bank, Abacus, ultimately went on to sell to the government-sponsored mortgage dealer, Fannie Mae.
What were these nineteen people charged with? The case had been sold to the court and to the public—by Vance, mostly—as having something to do with the financial crisis, setting up the bank as a scapegoat for the 2008 blowup. Vance bragged that it was the first indictment in New York of a bank since the BCCI crisis in 1991, and he subtly compared Abacus to the aforementioned bailout all-stars like Citigroup and Bank of America, ostensibly the true villains of the financial crisis, by warning that Abacus’s crimes might ultimately lead to the taxpayer footing the bill. “If we’ve learned anything from the recent mortgage crisis,” he said, “it’s that at some point, these schemes will unravel and taxpayers could be left holding the bag.”
Vance made sure to play rough with the defendants, just to let them know how angry The People were about the financial crisis. In an extraordinary scene over a year before, on May 31, 2012, Vance had hauled all nineteen of the Abacus defendants into court to face indictment. For the benefit of the press, he had them chained not only at the hands and feet but to one another.
This otherworldly chain gang of bewildered immigrants had been led into the courtroom like a giant, slow-moving snake. It was like a scene out of Bagram or Guantánamo Bay—all that was missing were the hoods.
Incredibly, three of the nineteen people who were put in chains had already been arraigned by Vance and released on bail. Prosecutors had asked them to voluntarily report to court that day, and they came, having no idea what for. When they appeared, Vance had had them cuffed and chained all over again, then paraded into court to be rearraigned, purely for the benefit of the cameras.
“I’m no softie on crime,” says Kevin Puvalowski, the attorney for Abacus and a former federal drug prosecutor. “But I’ve seen death penalty defendants treated with more dignity.”
Again, on the same day as this bizarre photo op, Vance had stood up in a press conference and described the indictment of Abacus as a direct blow against the behavior that had caused the financial crisis. “The lessons of the financial crisis are still being learned,” he said sternly.
And in its limited coverage of the case, the press mostly upheld the notion that the Abacus indictment was aimed at the heart of the financial crisis. “The indictment against the bank and its employees describes the sort of scheme that led to the financial crisis of 2008,” wrote The New York Times in a typical account, “when the risk of mortgages to borrowers was disguised and passed on to investors.”
As for Vance, he got what he wanted out of the presser: a trophy. In subsequent coverage in newspapers like The Wall Street Journal, he would henceforth be referred to as the DA who “indicted a bank for mortgage fraud.”
But this case had nothing to do with the financial crisis. In fact, it was clear just from reading the indictment that the improprieties uncovered at Abacus were highly idiosyncratic and specific to Chinatown’s immigrant population. Though tax evasion wasn’t part of the case, it lurked in the background. Clearly, many mortgage applicants, who worked in cash businesses in the immigrant Chinese community, had not wanted to declare all their income.
After the Abacus indictment, in fact, I heard whispers from a police source with long experience in Chinatown that some of the bank’s customers may have been involved in schemes like trademark counterfeiting—not exactly a surprise, since it’s hard to visit Chinatown and not run into someone selling phony Prada bags or Rolex watches out of the back of a van somewhere.
Thus the underlying crime in this case seemed to be that Abacus’s customers could afford to pay for a mortgage but didn’t want to say how, exactly. They had been, in other words, not overreporting but underreporting their incomes.
There was also a bizarre racial component to the case. Buried in the charges was the thinly veiled assumption that Abacus senior management encouraged their borrowers to commit fraud in their applications because they knew they could rely upon the generally accepted cultural proposition that Chinese people, like the evil Lannisters in Game of Thrones, always pay their debts. Vance’s indictment more or less says this out loud, claiming that Abacus management “falsely told employees that the exceptionally low default rate of Abacus-originated loans made the underlying accuracy of loan documents insignificant.”
The description had been true—the Abacus mortgage holders had paid their debts. In fact, from the date of the first offense as defined by the prosecutors, the quasi-governmental Fannie Mae had made a profit of $220 million on Abacus-issued home loans. In all, Abacus had one of the lowest default rates in the entire country. It was about 0.5 percent, roughly ten times better than the average.
Thus this was a very different kind of case from the more common fraud of the financial crisis era, which mostly involved gigantic banks and mortgage lenders selling the toxic and ultimately worthless subprime mortgage loans of broke and underemployed middle Americans as AAA-rated investments to state pension funds, foreign trade unions, and other suckers. Abacus was almost certainly a case about hiding income; the financial crisis was caused by a snake-oil scheme to sell worthless loans as gold.
Everyone got what they wanted from the Abacus prosecution. The city got to say it was being tough on financial crime. The press got to run a thrilling picture of harsh justice. Vance got a line to add to his résumé. The only losers were the public, who had no idea that the real culprits for the financial crisis were being set free, while the bank on trial had nothing to do with the losses that had been suffered by almost every ordinary American in the crash. As one city investigator put it, Abacus was “the Lee Harvey Oswald of banks— a patsy.”
In any case, this same collection of freaked-out immigrant patsies were back in court now, this time without their chains. Most of the defendants had their own lawyers, as did the bank itself, so the courtroom was fairly packed with defense counsel. Most of these defense lawyers had filed “Clayton motions,” a New York state legal procedure in which a defendant can ask a judge to dismiss charges on the general grounds that doing so would be in furtherance of justice.
Among other things, a Clayton motion asks the judge to consider “the purpose and effect” of punishment and the “impact on the public interest” of a dismissal. They are motions, in other words, that ask a judge to consider the consequences of prosecution, balanced against the public interest.
One by one, defense counsel stood up to argue to the ostentatiously bored Judge White why their clients should be let go. Some argued their clients were too old or too young, or had been at the bank for only a few months, or had never in their whole lives been in trouble with the law. (They virtually all argued that.) Some said their clients had been new on the job and had simply filled out a few papers incorrectly according to the instructions of superiors. The list of reasons for leniency went on and on.
But finally one of the defense lawyers, a former city prosecutor named Sanford “Sam” Talkin, a man with a deep tan and a neatly shaven head, got to a larger and more dangerous point. Gently waving a hand in the direction of the Abacus defendants, Talkin confronted Judge White. “Your Honor,” he said, “I want you to compare them to Citigroup. Just last week Citigroup settled for $968 million for either underperforming or defaulted home loans. . . .
“But this pales in comparison to Bank of America, which paid $6.8 billion dollars, with a b, for underperforming or defaulted home loans. Civil settlement, no criminal charges . . . Wells Fargo Bank, $3.3 billion, no criminal prosecution . . . Ally GMAC, $3.3 billion, civil settlement, no criminal charges. JPMorgan Chase . . . another $3.3 billion for the same purpose, civil settlement, no criminal charges.”